Use a big-picture view of the S&P to gain greater clarity

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
is a certified contributor, and
TheTechTrader.com with Harry Boxer.

Over the last several weeks, I have seen countless columns touting "clues" about the market. Yet, I have seen one analyst after another become whipsawed time and again throughout all of 2015, and many even longer than that. No doubt it has been a tough market for most. Many readers have been asking "does anyone have a clue?"

Unless you understand the larger context in which the market resides, I do not believe that any analysis methodology will ever be able to appropriately warn you when or where to become cautious or aggressive as well as Elliott Wave analysis — enhanced with our Fibonacci Pinball method — does.

Our larger perspective views the market in a very simple way, and tells us that the market is struggling as it completes its 3rd wave of its 5 wave structure off the 2009 lows. When completed, we will likely be heading back toward the 1800s to complete the 4th wave in the 5 wave structure off the 2009 lows. However, the larger-degree multi-year top to this 5 wave structure off the 2009 lows will not likely complete until the end of 2017, and we should still be able to move to at least the 2500 region in the SPX by then.

Our larger framework in the market has also pointed to the fact that the S&P 500 has most likely been within an ending diagonal in 2015, which became evident to us back in March. I noted back then that the trading in the SPX was going to be quite difficult with much chop, and strong reversals on the upside and downside would be the nature of the beast until it completed. When it became clear that the ending diagonal was in play, we had to consider lowering our targets for the top of this 3rd wave. As the market provided additional cues, we adjusted, as one must always do in a non-linear market.

So while the ideal targets for this segment of this multi-year rally were initially much higher, the manner in which the market was acting for the last few months still allowed us to correctly be bullish and looking for higher highs — specifically in the Russell 2000
IWM, -1.83%
— while many others were looking for the sky to fall.

If you remember, I stated many times (all the way back to 2014) that I expected the Russell to outperform, and it has clearly done so. But when the IWM approached our next target in the 129 region, I noted to those who view my daily live videos that I was reducing my longer-term IWM position to one-quarter of my full position and will allow the market to prove its bullish intent to me before I move back in at that full position. I did not want to see the market break below 126.54 to maintain the strongly bullish impulsive pattern it had developed since 2014. But this past week, the Russell joined the SPX in its overlapping pattern when it broke 126.54.

So, with the break down in the IWM below 126.54, this placed me in a market-neutral stance and is a clear message to me that it is time to become very cautious, as I have been warning for the last several weeks. But, the main reason that I have not gone full out "bearish" is that I still have a pattern that has a reasonable probability of taking the market back up to the 2175-2200 region over the next month or two.

Yet, there is just as good a probability at this time that we have begun the correction toward the 1800 region. So, when the market does not provide a clear edge, I move to a neutral stance until I gain more clarity. Should we find ourselves moving into this stance, trading individual stocks is where one's focus should be, as there are really good short and long setups still available.

At this point in time, if the market were to drop below the 2020 SPX level, that would likely count as a larger degree a-wave of the larger primary 4th wave to the 1800 region. That will be my signal to turn to a "market bearish" stance, and I will be looking to short the b-wave bounce we would most likely see when the red a-wave has completed. That b-wave bounce would likely take us back to the 2075-2100 region, so I am in no rush to trade to the bearish side of the market just yet.

This market has not been kind to those who have attempted to trade it to the short side, and since there is a reasonable probability that the market can still attempt one more push to a higher high, I want to let the market prove to me the bullish patterns are done before I begin to aggressively trade the downside. Again, remember that this correction will not take one day, nor will it take one month. This correction will likely take us down into the fall if it has begun, so there will likely be plenty of time to set up a short trade for the drop to 1800. Not only is patience a virtue, but it can also save you money from shorting prematurely in a long term bull market.

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